Recently released details of Kenya’s 2014 loan agreement with China to finance a controversial railway project have once again highlighted the predatory nature of Chinese lending in developing countries.
The contract not only imposed nearly all risk on the borrower — including requiring binding arbitration in China to settle any dispute — but it also raised those risks to unmanageable levels, such as by setting an unusually high interest rate.
With those terms, it is no wonder that multiple countries around the world have become ensnared in sovereignty-eroding Chinese debt traps.
Over the past decade, China has become the world’s largest single creditor, with loans to low and middle-income countries tripling to US$170 billion at the end of 2020. Its outstanding foreign loans exceed 6 percent of global GDP, making China competitive with the IMF as a global creditor.
Through loans extended under its US$838 billion Belt and Road Initiative, China has overtaken the World Bank as the world’s largest funder of infrastructure projects.
Since the start of the COVID-19 pandemic, China’s overseas lending for infrastructure projects has been in decline — until 2019, it was rising sharply.
This is partly because the pandemic left partner countries in dire economic straits, although growing international criticism of China’s predatory lending likely also contributed.
This downward trend augurs the end of colonial-style lending by China.
However, the decline has been offset by an increase in bailout lending, mostly to Belt and Road partner countries — including Kenya — which were already weighed down by debts owed to China.
The scale of the bailout lending is massive. The top three borrowers alone — Argentina, Pakistan and Sri Lanka — have received US$32.8 billion in rescue lending from China since 2017. Pakistan has been the biggest borrower, receiving a staggering US$21.9 billion in Chinese emergency lending since 2018.
This highlights the self-reinforcing debt spiral into which China thrusts countries. Unlike the IMF, China does not attach stringent conditions to its loans, so countries can simply borrow more to service outstanding debts, thus sinking ever deeper into debt.
China’s loan contracts are typically shrouded in secrecy. Kenya’s revelations were technically in violation of its agreement’s sweeping confidentiality clause. In many cases, the loans are hidden from taxpayers, undermining government accountability.
China increasingly directs its lending not to governments, but to state-owned companies, state-owned banks, special purpose vehicles and private-sector institutions in recipient countries. The result is crushing levels of “hidden debt.”
In Laos, where hidden debts to China eclipse official debts, the landlocked country was forced to hand China majority control of its national electricity grid to stave off default following the pandemic shock. It could find itself with little choice but to barter away land and natural resources.
There is ample precedent for this. Several of China’s debtors have been forced to cede strategic assets to their creditor.
Tajikistan has surrendered 1,158 square kilometers of the Pamir mountains to China, granted Chinese companies rights to mine gold, silver and other mineral ores in its territory and approved the Chinese-funded construction of a military base near its border with Afghanistan.
Sri Lanka’s debt crisis first attracted international attention in 2017. Unable to repay Chinese loans, the country signed away the Indian Ocean region’s most strategically important port, Hambantota, and more than 6,000 hectares of land around it, by granting a 99-year lease to China.
In Sri Lanka, the port transfer was likened to a heavily indebted farmer giving his daughter to an unyielding money lender. Despite this sacrifice, Sri Lanka defaulted on its debts earlier this year.
Similarly, Pakistan has given China exclusive rights to run its strategically located Gwadar Port for four decades. During that time, China would pocket 91 percent of the port’s revenue, and the China Overseas Ports Holding Company would enjoy a 23-year tax holiday to facilitate its installation of equipment and machinery at the site.
Near Gwadar, China plans to build an outpost for its navy — a move that follows a well-established pattern. Debt entrapment enabled China to gain its first overseas naval base in Djibouti, strategically situated at the entrance to the Red Sea.
China is also seeking a naval base on the coastline of West Africa, where it has made the most progress in Equatorial Guinea, a heavily indebted low-income country.
This is the result of a lending strategy that is focused squarely on maximizing leverage over borrowers.
As one international study said: “Cancellation, acceleration and stabilization clauses in Chinese contracts potentially allow the lenders to influence debtors’ domestic and foreign policies.”
China often exercises this policy leverage by reserving the right to recall loans arbitrarily or demand immediate repayment.
China can use its overseas lending to advance its economic and diplomatic interests. If China can dim the lights in Laos, it has a certain ally in multilateral forums. If it can drive a country to debt default, it can secure all the trade and construction contracts it wants. If it can control a country’s ports, it can strengthen its strategic position.
The details of China’s loan contracts with developing countries have not yet come fully to light.
However, it is clear that China’s creditor imperialism carries far-reaching risks for debtors and the international order.
Brahma Chellaney is a professor of strategic studies at the New Delhi-based Center for Policy Research, and a fellow at the Robert Bosch Academy in Berlin.
Copyright: Project Syndicate
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